FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2000
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from : to
Commission file number: 1-8133
XEROX CREDIT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 06-1024525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 First Stamford Place, Stamford, Connecticut 06904
(Address of principal executive offices) (Zip Code)
(203) 325-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
7.20% Notes due 2012 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding as of April 30, 2000
Common Stock 2,000
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
THIS DOCUMENT CONSISTS OF 14 PAGES
(1)
To the extent that this Form 10-Q Report contains forward-looking statements
and information relating to the Registrant, such statements are based on the
beliefs of management as well as assumptions made by and information currently
available to management. The words "anticipate," "believe," "estimate,"
"expect," "intend", "will" and similar expressions, as they relate to
Registrant or Registrant's management, are intended to identify forward-
looking statements. Such statements reflect the current views of Registrant
with respect to future events and are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended. The Registrant does not intend to update
these forward-looking statements.
(2)
XEROX CREDIT CORPORATION
Form 10-Q
March 31, 2000
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations 8
Capital Resources and Liquidity 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
Part II - Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
Exhibits
Computation of Ratio of Earnings to Fixed Charges (Xerox
Credit Corporation) 13
Computation of Ratio of Earnings to Fixed Charges (Xerox
Corporation) 14
Financial Data Schedule (filed in electronic form only)
(3)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Millions)
Three Months Ended
March 31,
2000 1999
Earned income:
Contracts receivable $ 103 $ 104
Expenses:
Interest 67 66
Operating and administrative 3 3
Total expenses 70 69
Income before income taxes 33 35
Provision for income taxes 13 14
Net income $ 20 $ 21
See accompanying notes.
(4)
XEROX CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
March 31, December 31,
2000 1999
(UNAUDITED)
Cash and cash equivalents $ - $ -
Investments:
Contracts receivable 5,876 5,653
Notes receivable - Xerox and affiliates 56 56
Unearned income (678) (647)
Allowance for losses (149) (138)
Total investments 5,105 4,924
Other assets 16 16
Total assets $ 5,121 $ 4,940
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Notes payable within one year:
Commercial paper $ 1,403 $ 160
Current portion of notes payable after one year 1,301 2,025
Notes Payable - Xerox and affiliates 400 717
Notes payable after one year 1,305 1,330
Due to Xerox Corporation, net 93 97
Accounts payable and accrued liabilities 40 52
Deferred income taxes 29 29
Total liabilities 4,571 4,410
Shareholder's Equity:
Common stock, no par value, 2,000 shares
authorized, issued, and outstanding 23 23
Additional paid-in capital 219 219
Retained earnings 308 288
Total shareholder's equity 550 530
Total liabilities and shareholder's equity $ 5,121 $ 4,940
See accompanying notes.
(5)
XEROX CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Millions)
Three Months Ended
March 31,
2000 1999
Cash Flows from Operating Activities
Net income $ 20 $ 21
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in operating assets and liabilities (10) 16
Net cash provided by operating activities 10 37
Cash Flows from Investing Activities
Purchases of investments (617) (589)
Proceeds from investments 431 502
Net cash used in investing activities (186) (87)
Cash Flows from Financing Activities
Change in commercial paper, net 1,243 (189)
Change in notes with Xerox and affiliates, net (317) (536)
Proceeds from long-term debt 50 850
Principal payments on long-term debt (800) (75)
Net cash provided by financing activities 176 50
Increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
Cash and cash equivalents, end of period $ - $ -
See accompanying notes.
(6)
XEROX CREDIT CORPORATION
Notes to Consolidated Financial Statements
(1) The unaudited consolidated interim financial statements presented herein
have been prepared by Xerox Credit Corporation (the "Company") in accordance
with the accounting policies described in its Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 and should be read in conjunction with
the Notes to Consolidated Financial Statements which appear in that report.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair statement of the
operating results for the interim periods presented have been made.
(2) During the first three months of 2000, the Company redeemed $800 million
of fixed-rate notes on their maturity dates.
(3) During the first three months of 2000, the Company sold a total of $50
million of adjustable-rate notes that mature in 2002. The interest rates on
these notes have been swapped to LIBOR-based rates.
(4) The terms of a Support Agreement with Xerox provide that the Company will
receive income maintenance payments from Xerox, to the extent necessary, so
that the Company's earnings shall not be less than 1.25 times its fixed
charges. For purposes of this calculation, both earnings and fixed charges
are as defined in Section 1404 (formerly Section 81(2)) of the New York
Insurance Law. In addition, the agreement requires that Xerox retain 100
percent ownership of the Company's voting capital stock.
(7)
XEROX CREDIT CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Contracts receivable income represents income earned under an agreement
with Xerox pursuant to which the Company purchases long-term accounts
receivable associated with Xerox' sales of equipment. These receivables arise
primarily from Xerox equipment being sold under installment sales and sales-
type leases, including any residual income related to such leases.
Earned income from contracts and notes receivable was $103 million and
$104 million for the first three months of 2000 and 1999, respectively. The
slight decrease was primarily due to a smaller average portfolio of contracts
receivable resulting from the flow-through impact of the 1999 receivable sales
partially offset by higher interest rates.
Interest expense increased slightly to $67 million in the first quarter
of 2000 from $66 million in the same period in 1999. The increase is due to
higher interest rates and the increase in the Company's debt-to-equity ratio
partially offset by a smaller average portfolio of contracts receivable
resulting from the flow-through impact of the 1999 receivable sales.
Since substantially all of the Company's contracts receivable earn fixed
rates of interest, the Company "match funds" the contracts by swapping
variable-rate commercial paper and medium term notes (including fixed-rate
medium term notes that had been swapped to variable rates) into fixed interest
rates for specified maturities. This practice is employed because it
effectively "locks in" a spread and eliminates the risk of shrinking interest
margins in a rising interest rate environment. Conversely, this practice
effectively eliminates the opportunity to increase margins when interest rates
are declining. The Company intends to continue to match its contracts
receivable and indebtedness to ensure an adequate spread between interest
income and interest expense.
Operating and administrative expenses were $3 million for the first
quarter of 2000 and 1999. These expenses are incurred to administer the
contracts receivable purchased from Xerox.
The effective income tax rate for the first three months of 2000 and 1999
was 38.9 percent.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at their fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Certain of the Company's interest
rate swap contracts hedge cash flow exposures. The accounting for such cash
flow hedges under SFAS No. 133 will require the Company to record adjustments
to other comprehensive income, including an adjustment at transition. The
Company does not expect the implementation of this Statement to have a
material effect on its results of operations or financial condition, although
shareholders' equity may experience increased volatility. The Company will
adopt SFAS No. 133, as amended, beginning January 1, 2001.
(8)
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of cash are from the collection of Xerox
contracts receivable and borrowings.
Net cash provided by operating activities was $10 million in the first
three months of 2000 compared to $37 million provided by operating activities
during the same period in 1999. The decrease was primarily due to the timing
of interest payments. During the first three months of 2000, accrued interest
decreased primarily due to the increased use of short-term commercial paper to
refinance medium-term borrowings. During the first three months of 1999,
accrued interest grew primarily due to increased use of medium-term funding in
place of short-term commercial paper borrowings.
Net cash used in investing activities was $186 million in the first three
months of 2000 compared to $87 million in the first three months of 1999.
This change reflects both the effects of Xerox equipment sales growth and
lower first quarter 2000 collections resulting from 1999 securitization
activity.
The changes in operating and investing cash flows resulted in net cash
from financing activities of $176 million during the first three months of
2000, versus $50 million provided by financing activities during the same
period in 1999. During the first three months of 2000, commercial paper
balances were increased from an abnormally low Y2K contingency level at year-
end 1999.
At March 31, 2000, the Company had registered domestic shelf capacity of
$1,950 million. In addition, a $4 billion Euro-debt facility is available to
the Company, Xerox and Xerox Capital (Europe) plc ("Xerox Capital"), of which
$1,865 million was unused at March 31, 2000.
The Company and Xerox have joint access to a $7 billion revolving credit
agreement with various banks which expires in 2002. Up to $4 billion of this
revolver is also accessible by Xerox Capital and Xerox Overseas Holdings
Limited. Any amounts borrowed under this facility would be at rates based, at
the borrower's option, on spreads above certain LIBOR reference rates.
Xerox' and the Company's present credit ratings, including the following
events, enable ready access to the credit markets. On April 6, 2000, Moody's
Investors Service, Inc. announced that the long and short term credit ratings
of Xerox and its financially supported subsidiaries (including the Company)
were downgraded to A3 from A2 and to Prime-2 from Prime-1, respectively. On
April 7, 2000, Fitch IBCA announced that the long-term credit rating of Xerox
and its subsidiaries (including the Company) was downgraded to A from A+.
Simultaneously, Fitch re-affirmed Xerox and its subsidiaries short-term
ratings at F1. In December 1999, Standard & Poor's announced a negative
outlook for Xerox' and the Company's ratings. On May 11, 2000, following the
announcement of the resignation of Xerox' President and CEO G. Richard Thoman,
Standard and Poor's placed the Company's credit ratings on "CreditWatch with
negative implications". The downgrades and negative outlook will result in
somewhat higher borrowing costs for the Company in future periods as debt is
refinanced. There is no assurance that these credit ratings can be maintained
and/or that the Company will continue to have ready access to the credit
markets in the future.
The Company believes that cash provided by continuing operations, funding
available through its commercial paper program supported by its committed
credit facility, and its readily available access to the global capital
markets are more than sufficient to enable the Company to meet its financing
needs. New borrowing associated with the financing of customer purchases of
Xerox equipment will continue in 2000 and decisions regarding the size and
timing of any new term debt financing will be made based on cash flows, match
funding needs, refinancing requirements and capital market conditions.
(9)
The Company is exposed to market risk from changes in interest rates that
could affect results of operations and financial condition. To assist in
managing its interest rate exposure and match funding its principal assets,
the Company routinely enters into certain financial instruments, primarily
interest rate swap agreements. In general, the Company's objective is to hedge
its variable-rate debt by paying fixed rates under the swap agreements while
receiving variable-rate payments in return. Additionally, in order to manage
its outstanding commercial paper, the Company opportunistically issues
variable- and fixed-rate medium term notes which are swapped to attractive
LIBOR-based rates. The Company does not enter into derivative instrument
transactions for trading purposes and employs long-standing policies
prescribing that derivative instruments are only to be used to achieve a set
of very limited objectives.
During the first three months of 2000, the Company entered into interest
rate swap agreements that effectively converted $814 million of variable-rate
debt into fixed-rate debt. These agreements mature at various dates through
2005 and resulted in a weighted average interest rate of 7.06 percent. The
Company also entered into an interest rate swap agreement during the first
quarter of 2000 that effectively converted $50 million of adjustable-rate debt
into variable-rate debt indexed to LIBOR rates. This agreement matures in
2002.
The Company's interest rate hedging is typically unaffected by changes in
market conditions as swaps are normally held to maturity consistent with the
Company's objective to lock in interest rate spreads on the underlying
transactions.
As of March 31, 2000, the debt-to-equity ratio was 8.0 to 1. Under the
terms of the Amended and Restated Operating Agreement, Xerox has the option,
but no obligation, to transfer additional funds to the Company in order to
maintain such ratio at a specific level. No such transfers were made during
the period covered by this report. It is the Company's intention to maintain
the debt-to-equity ratio at no greater than 8 to 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information set forth in the ninth, tenth and eleventh paragraphs under
the caption "Capital Resources and Liquidity" in Item 2 above is hereby
incorporated by reference in answer to this Item.
(10)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3 (a) Articles of Incorporation of Registrant filed
with the Secretary of State of Delaware on
June 23, 1980.
Incorporated by reference to Exhibit 3(a) to
Registrant's Annual Report on Form 10-K for
the Year ended December 31, 1999.
(b) By-Laws of Registrant, as amended through
September 1, 1992.
Incorporated by reference to Exhibit 3(b)
to Registrant's Quarterly Report
for the Quarter ended March 31, 1997.
Exhibit 12 (a) Computation of the Company's Ratio of Earnings
to Fixed Charges.
(b) Computation of Xerox' Ratio of Earnings
to Fixed Charges.
Exhibit 27 Financial Data Schedule (Electronic Form Only)
(b) Reports on Form 8-K.
None
(11)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XEROX CREDIT CORPORATION
May 12, 2000 BY: /s/ Richard Ragazzo
Richard Ragazzo
Vice President, Treasurer and
Chief Financial Officer
(12)
Exhibit 12(a)
XEROX CREDIT CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Three Months Ended
March 31, Year Ended December 31,
2000 1999 1999 1998 1997 1996 1995
Income before income taxes $ 33 $ 35 $ 180 $ 137 $ 123 $ 123 $ 119
Fixed Charges:
Interest expense
Xerox debt 9 8 32 23 3 5 6
Other debt 58 58 211 217 214 199 213
Total fixed charges 67 66 243 240 217 204 219
Earnings available for
fixed charges $ 100 $ 101 $ 423 $ 377 $ 340 $ 327 $ 338
Ratio of earnings to
fixed charges (1) 1.49 1.53 1.74 1.57 1.57 1.60 1.54
(1) The ratio of earnings to fixed charges has been computed by dividing
total earnings available for fixed charges by total fixed charges.
(13)
Exhibit 12(b)
XEROX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions)
Three months ended Year ended
March 31, December 31,
2000 1999 1999 1998** 1997 1996 1995
Fixed charges:
Interest expense $ 227 $ 206 $ 803 $ 749 $ 617 $ 592 $ 603
Rental expense 29 35 132 145 140 140 142
Total fixed charges
before capitalized
interest and preferred
stock dividends of
subsidiaries 256 241 935 894 757 732 745
Preferred stock dividends
of subsidiaries 14 14 55 55 50 - -
Capitalized interest 3 - 8 - - - -
Total fixed charges $ 273 $ 255 $ 998 $ 949 $ 807 $ 732 $ 745
Earnings available for
fixed charges:
Earnings*** $ (345) $ 504 $2,104 $ 837 $2,268 $2,067 $1,980
Adjustment to reflect
distributed income
from minority owned
companies 35 (10) (68) (27) (84) (84) (90)
Add fixed charges before
capitalized interest
and preferred stock
dividends of
subsidiaries 256 241 935 894 757 732 745
Total earnings
available for
fixed charges $ (54) $ 735 $2,971 $1,704 $2,941 $2,715 $2,635
Ratio of earnings to
fixed charges (1)(2) * 2.88 2.98 1.80 3.64 3.71 3.54
(1) The ratio of earnings to fixed charges has been computed based on the
Company's continuing operations by dividing total earnings available for fixed
charges, excluding capitalized interest and preferred stock dividends of
subsidiaries, by total fixed charges. Fixed charges consist of interest,
including capitalized interest and preferred stock dividends of subsidiaries,
and one-third of rent expense as representative of the interest portion of
rentals.
(2) The Company's ratio of earnings to fixed charges includes the effect of
the Company's finance subsidiaries, which primarily finance Xerox equipment.
Financing businesses are more highly leveraged and, therefore, tend to operate
at lower earnings to fixed charges ratio levels than do non-financial
businesses.
* Earnings for the three months of 2000 were inadequate to cover fixed
charges. The coverage deficiency was $327 million. Excluding the 2000
restructuring and CPID in-process R&D charges, the ratio of earnings to fixed
charges would be 2.19.
** Excluding the effects of the charges recorded in connection with the 1998
restructuring plan, the ratio of earnings to fixed charges would be 3.55.
*** Sum of "Income (Loss) before Income Taxes (Benefits), Equity Income and
Minorities' Interests" and "Equity in Net Income of Unconsolidated
Affiliates."
(14)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XEROX
CREDIT CORPORATION'S MARCH 31, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN
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